Convertable bonds

eShA · 02-26-2006, 03:30 AM

hi
like we have convertable bond that can be converted into shares at certain condition (dont go in detail of that), would it be possible to create such share that can be converted into bonds, if it is possible what can be the possible benefit of it?

regard,,,,
eShA

Although this may seem a paradox, all exact science is dominated
by the idea of approximation.

derivativetrader · 02-27-2006, 12:22 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by eShA
 
like v hav convertable bond that can be converted into share at certain condition(dnt go in detail of that), would it be possible to create such share that can be converted in to bonds .. if it is possible wht can be the possible benefit of it.

<hr height="1" noshade id="quote"></blockquote id="quote">

It is possible and I think would only be tradeable on OTC market. Investor would want this security because he might have a bearish view on the stock market, and when the stock market is doing bad, he would exercise his option and convert his investment into bonds.

A typical investor for this security might be a pension fund. Assuming the PF is underfunded at present and given stock market might not do as good in future as it is doing now, trustees might invest in stocks that could be convertable into bonds if the market fall by some pre-determined strike price/level.

eShA · 02-27-2006, 02:17 AM

thx well if this is possible then y dnt we found such funds in market despite of such extensive research in financil mkt?
well i think it is possible but not In benefit of company
how? by doing this co. might lose its share holder. and much concerted debt/equity ratio. which is again bad..
kindly elabrate me y u said that they can only be tradeable in OTC market?

regard,,,,
eShA

Although this may seem a paradox, all exact science is dominated
by the idea of approximation.

derivativetrader · 02-27-2006, 06:57 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">

well if this is possible then y dnt we found such funds in market despite of such extensive research in financil mkt?

kindly elabrate me y u said that they can only be tradeable in OTC market?

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This is because this is an example of 'structured product' and since there isn't much demand for these securities, they wouldn't be traded on exchanges.

<blockquote id="quote">quote<hr height="1" noshade id="quote">

well i think it is possible but not In benefit of company
how? by doing this co. might lose its share holder. and much concerted debt/equity ratio. which is again bad..

<hr height="1" noshade id="quote"></blockquote id="quote">

Increasing debt is not necessarily a bad strategy as it results in tax benefits. As debt and equity are substitutes from capital markets points of view, so an increase of one by of setting another may not be a huge problem. It all depends on case by case basis.

eShA · 02-27-2006, 05:03 PM

let me argue this information with my teacher and then i put some more question on the same.

regard,,,,
eShA

Although this may seem a paradox, all exact science is dominated
by the idea of approximation.

derivativetrader · 02-27-2006, 09:20 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by eShA
 

let me argue this information with my teacher and then i put some more question on the same.

regard,,,,
eShA

Although this may seem a paradox, all exact science is dominated
by the idea of approximation.

<hr height="1" noshade id="quote"></blockquote id="quote">

On a separate note, pricing a convertible bond is very difficult because you have to take into account the martingale (random) property of stock prices, correlation between stock and bond markets etc.

Good luck
DT